The US M&A market is primed for use of a bespoke,
tax-free sales structure known as a reverse morris trust
RMTs numerous transaction steps make them notoriously
difficult to complete, and they are only applicable in limited
circumstances. But, a combination of market conditions mean
more corporates are looking at RMTs as a serious
A lot of people are looking at these right now,
said Robert Profusek, head of Jones Days M&A
predictions that 2012 would be a bumper year for spinoffs
have proved accurate. Spinoffs are essentially tax-efficient
intra-company reshuffles that increase shareholder value, but
they are also the first step of a RMT.
Reading between the lines, their announcement is an
invitation the market. Its a classic case of
signalling to the world if you are interested, let us
know, said Profusek.
After the spinoff, the two major steps to complete a RMT are
as follows: a smaller, external company merges with the
spin-co; and, the resulting merged company issues more than 50%
of its shares to the spin-cos original parent.
The second factor creating a market ripe for RMTs is
shareholder activism. The growing power of activist investors
and their preference for so-called pure plays has pushed boards
to separate different business groups. Also driving the push
towards pure plays is the equity markets not accurately valuing
combined companies on a combined multiple-basis.
Since the global financial crisis, investors
arent getting the values right, said another US
Finally, low interest rates in the US (and Asia) means
financing for these deals is cheap.
Some companies have shown a penchant for RMTs, most notably
Proctor & Gamble. The consumer goods company used the
structure to sell part of its
Folgers coffee unit in 2008, and planned
to do the same for its sale of Pringles before the other
party, Diamond Foods, withdrew after becoming the subject of an
accounting fraud investigation.
Georgia Gulf and PPG Industries combined via a RMT in a
$2.1 billion deal, and there is
mounting speculation that Liberty Medias proposed
acquisition of Sirius XM will also use the model.
Perhaps the biggest difficulty of completing a RMT is
finding a buyer that is smaller than the target. The size
differential means the spin-co is deemed the buyer under
Internal Revenue Service (IRS) rules, and its original parent
company and shareholders dont pay capital gains tax.
Despite retaining fewer shares in the merged entity, the
external company retains management and board control. But the
process is a strain on their share value, shareholder
confidence, and post-closing activities. Integrating a
target that is bigger than you can be difficult in
execution, said the US partner.
Since 2001 when the IRS released guidelines clarifying when
spinoffs, split-offs and RMTs will be tax-free, it is not
strictly necessary to obtain a tax ruling before using one of
these deal structures.
This is helpful given an IRS ruling takes between six to
nine months. But the extent of IRS requirements, and the tax
consequences for spin-cos parent and shareholders if they
arent satisfied, means many err on the side of
Most of the major deals are done based upon a private
letter ruling from the IRS. So many of these transactions are
conditioned upon receipt of a favourable IRS ruling, said
a New York-based tax partner.